![]() If the seller of a business decides to terminate all employees at the closing of the business transaction, severance agreements should be approached thoughtfully as they can offer much more than a mutually beneficial arrangement between employee and employer that helps to ease the affected employees’ transition to new opportunities. So, while employment law issues are not necessarily the primary driver in determining whether or not to sever employment relationships and what terms to include in a severance agreement, addressing these issues proactively can minimize post-transaction problems and potentially improve deal value. Starting this process early may also enhance the business value of the transaction to the parties, give the buyer a negotiating tool and the seller an added “asset,” and reduce the need for post-transaction adjustments or escrows. In either scenario, the employment-related aspects of a transaction are a process, not an event, and assessing these issues early can help ensure there is sufficient time to either adequately prepare for employment terminations, or set up the framework for a smooth employment transition. A seller may also decide not to terminate its employees in the interest of maintaining confidentiality about the transaction and avoiding uncertainty about retaining the necessary personnel to promote a smooth transition in ownership. In addition, there are practical implications of employment separation that can complicate the buyer’s transition and create unwanted delays in setting up operations, payroll, and benefits. These costs may render employment separation unattractive. At termination, employees must be paid all wages owed, accrued vacation time, and potentially severance pay. ![]() On the other hand, the costs of terminating employment relationships can be significant. A formal and clearly documented employment termination protects both the seller and the buyer. This is particularly beneficial if the subsequent employment will likely be with the entity acquiring the business, and the seller’s former employees will continue to work in the same facility post-acquisition, performing the same functions, using the same equipment and reporting to the same management. Terminating the employment of a seller’s employees can mitigate risks of exposure to liability for employment-related claims and provide a bright-line date of termination from employment by one entity before employment commences with another entity. On the other hand, there are also competing and equally compelling reasons not to terminate those relationships, making the risks of doing so “not worth it.” This is true even where the parties anticipate that the universe of the seller’s employees will seamlessly commence employment with the acquiring entity. There are often sound business and legal reasons, affecting all sides of a deal/restructure, for the selling entity to formally terminate employment relationships with its employees prior to the close of a transaction. Whether selling, acquiring, or restructuring a business, the complex issue of employment relationships and what to do with them should be considered as early in the process as possible. To Terminate Or Not Terminate, That Is The Question. Welcome to the monthly installment from CDF’s Business Transactions and Restructurings Group, highlighting labor and employment issues that can arise in business deals.
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